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1 PM Competitiveness of Swedish agriculture: indicators and driving forces 1 Gordana Manevska Tasevska & Ewa Rabinowicz Tel: E post: 1. Introduction Competitiveness is a relative measure, showing the ability of a firm or country to face competition and to succeed against such competition (Latruffe, 2010). Competitiveness can be assessed within the national or international context, in analyses at sector level. Sector competitiveness is often defined as persistency and good profitability to maintain market share in the domestic market and/or export markets (Ekman and Gullstrand, 2006). As classified by Latruffe (2010), measurements of competitiveness generally focus on: i) the production itself and trade characteristics (where competitiveness is measured with production trends, export or import indices, comparative advantage indices etc.), and ii) strategic management in terms of business structure and strategy (where competitiveness is measured by various cost indicators, profitability/viability, productivity and efficiency). So far, there is no agreement on how to define or measure competitiveness, so any results on competitiveness achievements need to be interpreted with caution. Moreover, given the relative dimension of existing competitiveness measures, the assessment of competitiveness requires comparisons of cases and of trends. This working document focuses on trends in competitiveness within primary agricultural production in Sweden. The document considers analytical approaches and provides analyses 1 This analysis is commissioned by the Swedish Government Commission for Competitive Agriculture Konkurrenskraftsutredningen 1

2 and a literature review summarising findings on the competitiveness of Swedish agriculture at sector level, relative to the trends in competitiveness in some of Sweden s competitors in the sector (Denmark, Germany, Ireland, Finland, the Netherlands, UK and Poland). Specifically, this working document provides: 1) An overall analysis of how production, exports, profitability/viability, productivity and efficiency in Swedish agriculture have changed over the period ) A comparative analysis of competitiveness development indices in the competitor countries. 3) A review of published studies analysing factors contributing to higher competitiveness. 2. Agricultural production characteristics of Sweden and selected EU countries The value of agricultural production and development trends are initial indicators of the competitiveness of the agricultural sector. In this working document, development within agricultural production is described for: 1) Total agricultural production value (including: 1a. plant production, 1b. animal production and 1c. agricultural services: leasing of machinery and equipment, including personnel etc.); and 2) the agricultural industry (total agricultural production value and the inseparable non agricultural secondary activities, such as processing of agricultural products on farm). The analysis incorporates evidence for Sweden and seven selected competitor EU member countries: Denmark, Germany, Ireland, the Netherlands, Finland, UK and Poland. Development trends are shown for the period using data from the Eurostat database. Definitions and concepts underlying terms and variables used in the Eurostat database are provided in the links given in footnotes 2. Figure 2.1 shows the production value and development in agricultural production value in Sweden over the period Additional background data on agricultural production value in Sweden and the selected EU countries can be found in the appendix (Tables A1 A5). 2 Link: /EN/KS EN.PDF and lex.europa.eu/lexuriserv/lexuriserv.do?uri=consleg:2004r0138: :sv:html. 2

4 production. A notable increase in agricultural services and in the value of inseparable nonagricultural secondary activities was observed over the period (Figure 2.2). Table 2.1 shows the average growth in the production value of plant and animal production over three consecutive periods: , and A graphical representation of these data is given in Figure 2.3. The calculation procedure used involved estimation of the chain index for the annual change in production value and then estimation of average value for the three consecutive periods. These periods were selected for the present analysis to provide an image of development trends in the period before Sweden joined the EU ( ), during the transition period ( ), and after EU enlargement ( ). The highest growth in plant production output in Sweden was recorded for the period The period before the 2005 was stagnant, with a stable level but with no development in production values. In the period , the growth in Swedish plant production value (9%) was among the highest observed in the selected EU countries used here for comparison (together with Denmark (9%) and Finland (8%)). High growth in plant production value was also achieved in Germany (7%), Ireland (7%) and UK (6%). The Netherlands was the leading country in terms of growth in agricultural production in the early 1990s ( ), but since then its growth has decreased to within the EU11 average (2% for and 4% for ). Tabell 2.1: Genomsnittlig tillväxt i värdet av vegetabilier och animalieproduktionen, justerat för köpkraftsstandard, för , och Vegetabilieproduktion Animalieproduktion Land 90/ 95 96/04 05/12 90/ 95 96/04 05/12 Sverige 96% 100% 109% 97% 100% 102% Danmark 96% 99% 109% 100% 101% 105% Tyskland 95% 102% 107% 95% 101% 105% Irland 96% 99% 107% 97% 97% 106% Nederländerna 129% 102% 103% 123% 99% 104% Finland 101% 108% 100% 103% Storbritannien 100% 98% 106% 100% 98% 105% Polen 100% 101% 103% 104% EU 11 95% 102% 104% 97% 100% 103% Källa: egna beräkningar, Eurostat uppgifter,

6 Animalieproduktion värde, i producent priser, justerat för köpkraftsstandard, för , i milj.. Källa: Eurostat uppgifter, ,000 20,000 15,000 10,000 5, Figur 2.5: Animalieproduktion värde, i producent priser, justerat för köpkraftsstandard, för , i milj.. Källa: Eurostat uppgifter, The value of Swedish animal production remained relatively stable, but development in the sector stagnated over the whole period. Although improvements were noted for the period , the growth in production value was among the lowest of the selected EU competitor countries used for comparison. The average growth in animal production value in Sweden was 2% for the period , which is below the EU11 average (3%). Compared with plant production, the growth in animal production value was generally lower. Remarkable growth in animal production value for the period was experienced in Ireland (6%) and in Denmark, Germany and UK (5%). As was the case for plant production value, the Netherlands had the highest growth rate in However, it is notable that its relatively low growth value in followed a peak in rapid growth in plant and animal production in Table 2.2 shows the average growth in total agricultural production, agricultural services and agricultural industry in Sweden and the selected EU countries in the periods , and The procedure used involved estimation of chain index for the annual change in production value and then estimation of average growth value for the three consecutive periods. A complementary graphical presentation of the results is given in Figure 2.6. Sverige Danmark Tyskland Irland Nederläderna Finland Stortbritanien Polen 6

10 Summary of production characteristics Agricultural production in Sweden in was stable, but with a tendency for faster growth after Average annual growth in total agricultural production value (plant and animal production, including agricultural services) and the agricultural industry (total agricultural production and the inseparable non agricultural secondary activities) in Sweden was 3% in , 1% in and 4% in (Table 2.2). Although this growth was within the EU11 average (3%), it approached the level observed in the selected competitor countries (except the Netherlands) in the periods and In those periods, the highest average growth in total agricultural production value and the value of the agricultural industry was observed for Denmark and Ireland (6%), followed by Germany, Finland, UK and Poland (5%). Average growth in agricultural production value in the Netherlands was 3%, i.e. the lowest among the selected countries. The growth in the value of the agricultural industry in Sweden was mainly due to strong development trends in the value of plant production, agricultural services (leasing machinery, equipment and personnel) and the inseparable non agricultural secondary activities (processing of agricultural products on farm). The development trend in plant production value in Sweden over the period was among the highest (9%) of the selected EU countries, together with Denmark (9%), and Finland (8%) (Table 2.1). High growth in plant production value was also achieved in Germany (7%), Ireland (7%) and UK (6%). The Netherlands was the leading country as regards growth in agricultural production in , but the development trend decreased thereafter to within the EU11 average (2% for , 4% for ). A remarkable increase in the value of agricultural services and the value of inseparable non agricultural activities was observed in Sweden for the period after 1995, with the highest increases of 17% and 12%, respectively, for , followed by stabilisation and average growth of 3% in , which was within the EU11 average. Swedish animal production value remained relatively stable, characterised by stagnation in the development trend for the sector over the whole period (Table 2.1). Although some progress was recorded for the period , the growth of Swedish animal production value was among the lowest (2%) of the EU competitor countries compared, and was below the EU11 average growth (3%). Ireland (6%), Denmark, Germany and UK (5%) achieved the highest progress in animal production value for the period

13 3. Trade and market share indicators The international competitiveness of sectors is commonly assessed by evaluating trade and market share indices and comparing trends of countries competing on the international market. In this working document, the actual values and changes in: Trade balance (TB), Grubel Lloyd (GL) index, Revealed Comparative Advantage (RCA) and Relative Import Advantage (RIA) were estimated for Sweden and selected EU competitor countries (Denmark, Germany, Ireland, the Netherlands, Finland, UK and Poland) over the period Eurostat data on external trade (imports and exports) for the period were used, complemented with data presented in other related studies. The Trade Balance Index shows the difference between exports (E fp ) and imports (I fp ) of food products (fp) (including drinks and tobacco), TB=E fp I fp. According to the statistical classification of economic activities in the EU, food products are: meat, fish, dairy, bread, sugar, confectionery and other food products, drinks and tobacco. The common reasoning is that large exports and high TB index values are signs that the industry in question is competitive on the market, whereas the trends over time give an indication of the development in competitiveness. Figure 3.1 shows the trade balance for food products (including drinks and tobacco) in Sweden. Handelsbalans av livsmedel (inklusive drycker och tobak), för , i milj.. Källa: Eurostat uppgifter, ,000 2,000 1, ,000 2,000 3,000 4,000 5,000 6,000 7, Sverige Danmark Tyskland Irland Nederläderna Finland Stortbritanien Polen Figur 3.1: Handelsbalans av livsmedel (inklusive drycker och tobak), för , i milj.. Källa: Eurostat uppgifter,

14 Up until 2004, the trade balance for food products in Sweden was negative, but approaching the equilibrium, and was relatively stable with a low rate of improvement. As shown in Table 3.1, in the period farm exports increased at a faster (9%) rate than farm imports (4%), and thus the positive trend observed was due to higher exports. For the period , the trade balance for food products in Sweden consistently decreased (Figure 3.1). Although the export value of food products maintained an increasing trend (8%), the faster growth in import value (12%), caused by an increase in food consumption, resulted in an overall negative trend (LRF, 2012). Figure 3.2 provides a graphical presentation of the average change (growth) in the export and import value of food products in the periods and , complementing Table 3.1. The calculation procedure in Table 3.1 was based on estimation of chain index for the annual change in export and import value, followed by estimation of average value growth value for the two consecutive periods. Tabell 3.1: Genomsnittlig tillväxt i export och importvärde av livsmedel (inklusive drycker och tobak) för perioden och Export Import Land Sverige 109% 108% 104% 112% Danmark 103% 104% 102% 103% Tyskland 102% 113% 100% 108% Irland 98% 107% 104% 106% Nederländerna 105% 109% 103% 109% Finland 102% 109% 96% 110% Storbritannien 99% 107% 103% 103% Polen 110% 115% 97% 99% EU % 110% 103% 106% Källa: egna beräkningar. Eurostat uppgifter, Compared with the selected competitor countries, Sweden had an intermediate position. The highest trade balance values were found in Denmark and Ireland. The Danish position was stable over the whole period, keeping the growth in exports and imports unchanged (Table 3.1, Figure 3.1). The Irish position was slightly weaker for the period , due to slower export growth, but was stable afterwards ( ). Over the whole period, the trade balance in Finnish food products was balanced at a level close to 14

15 equilibrium. The highest development in trade balance occurred in Poland, with export growth of 10% ( ) and 15% ( ), and a decreasing trend in import growth of 3% ( ) and 1% ( ). UK and Germany had the highest negative trade balance values, but with a tendency for improvement after Genomsnittlig tillväxt i export och importvärde av livsmedel (inklusive drycker och tobak), för och Källa: egna beräkningar, Eurostat uppgifter, % 115% 110% 105% 100% 95% 90% 85% 80% Export Import Sverige Danmark Tyskland Irland Nederläderna Finland Stortbritanien Polen EU 27 Figur 3.2: Genomsnittlig tillväxt i export och importvärde av livsmedel (inklusive drycker och tobak), för och Källa: egna beräkningar, Eurostat uppgifter, 2013 The Grubel Lloyd Index was used to determine the change in intra industry trade in the food sector in Sweden and the selected EU countries. This was calculated as GL fp = 1 ((apse fp I fp )/E fp +I fp ), where (E fp ) and (I fp ) are the export and import value of food products (fp) (incl. drinks and tobacco). The GL index ranges in value from 0 to 1, where a value approaching 1 is an indication of typical intra industry trade, meaning simultaneous export and import of products belonging to the food sector. Intra industry trade refers to trade exchange in food products belonging to different food categories (such as fish, meat, drinks) and in food products with different degrees of processing (such as fresh meat and sausages). A scale of GL values ranging between 0.50 and 0.75 is used to explain weak intra industry trade tendencies, and between 0.75 and 1.00 to explain strong intra industry trade tendencies. At the opposite of the scale, GL values approaching 0 indicate the existence of inter industry trade or high differences between the export and import value of food products from a country. A scale of GL values ranging between 0 and 0.25 is used to indicate strong inter 15

16 industry trade tendencies, whereas the range is used to explain weak interindustry trade tendencies. As Figure 3.3 shows, the GL values for Sweden fluctuated in the study period, but were within the range indicating weak intra industry trade tendencies. Grubel Lloyd index av intra industri handel, för Källa: egna beräkningar. Eurostat uppgifter, Sverige Danmark Tyskland Irland Nederläderna Finland Stortbritanien Polen EU 27 Figur 3.3: Grubel Lloyd index av intra industri handel, för Källa: egna beräkningar, Eurostat uppgifter, The average estimated GL value for Sweden for the periods and was 0.77 and 0.63, respectively. This indicates the existence of relatively balanced exchange (export and import) of food products. It is notable that after 2003, the difference between the value of exported and imported food products increased. A similar decrease in GL index was seen for UK for the period and for Poland for Denmark, Germany, the Netherlands and Finland formed a group with strong intra industry trade tendencies, i.e. trade in food related products. Details of the changes in food product exports and imports are given by the indices that follow. The Revealed Comparative Advantage (RCA) is a market share indicator representing the comparative advantage of an industry or company relative to its European or world competitors (Balassa, 1965, 1977). In this working document, we determined the Swedish export value of food products (including drinks and tobacco) relative to total export value and to the corresponding export performance of the EU 27. For this we calculated RCA as: (E land agricultural exports /E land total exports )/(E agricultural exports EU27 /E total exports EU27 ). The Swedish RCA 16

17 values and trends were then compared with the corresponding values and trends for the selected EU countries. For analytical purposes, RCA was used to assess the existence of comparative advantage in a sector, ranking countries or sectors based on RCA values, and also as an index of sector specialisation. In general, RCA values greater than 1 indicate a comparative advantage and a country s specialisation in exports for that sector, meaning that the sector is competitive within the economic system of the country with respect to other sectors. Values less than 1 indicate that a country has not specialised in that sector and that it has no comparative advantage. RCA values <0.8 indicate weak comparative advantage, whereas the comparative advantage is normal for RCA = , strong for RCA = and strongest for RCA >2.5. However, as the index is given in absolute values and is affected by the size of the economy, it is rarely comparable among countries. Rather, it is the RCA trend which is compared. Trends over a period indicate what is happening in competitive terms. Figure 3.4 shows the estimated values of the RCA index for Sweden and the selected EU countries. Revealed Comparative Advantage (RCA), värde och trend, i förhållande till exporten av EU 27, för Källa: egna beräkningar, Eurostat uppgifter, Sverige Danmark Tyskland Irland Figur 3.4: Revealed Comparative Advantage (RCA), värde och trend, i förhållande till exporten av EU27 för Källa: egna beräkningar, Eurostat uppgifter, The average value of the Swedish RCA index ( ) was 0.5. Thus based on the RCA index scale, Sweden is not specialising in agricultural production (see Table A6 in appendix). However, over the years the value of Swedish RCA remained rather constant 17

18 (Figures 3.4 and 3.5), indicating a stable position on the European food market. Finland and Germany were found to have similar characteristics, with an average RCA index value of less than 0.8 (see Table A6 in appendix). Over the years, however, the average value of the Finnish RCA index remained constant, whereas that for German agricultural production improved for the period (RCA = 0.4, RCA = 0.5) (Figure 3.5). A notable decrease in RCA values after 2004 was seen for Denmark, the Netherlands and Poland. These countries are highly specialised in exporting agricultural products, with RCA index values >2. Comparing the periods and , the average value of the RCA index decreased by 17% for Denmark and the Netherlands and by 26% for Poland. This decrease is an indication of loss of market share and thus of a competitive position on the EU market. A slight decrease in the RCA value was also found for Ireland and UK ( 9%) between and Figure 3.5 provides a graphical presentation of the average RCA values over the period and , as a complement to Table A6 (appendix). Jämförelse av det medel RCA värde: RCA v.s. RCA Källa: egna beräkningar, Eurostat uppgifter, Sverige Danmark Tyskland Irland Nederläderna Finland Stortbritanien Polen RCA 1999 till 2004 RCA 2005 till 2012 Figur 3.5: Jämförelse av det medel RCA värde, RCA v.s. RCA Källa: egna beräkningar, Eurostat uppgifter, Relative import advantage (RIA) is the counterpart market share indicator to RCA, measuring the import features of the food products (including drinks and tobacco) as (E land agricultural imports/e land total imports )/(E agricultural imports EU27 /E total imports EU27 ). As with RCA above, RIA was estimated for Sweden and the selected EU countries relative to the import performance of 18

19 the EU 27. Index values >1 and an increasing trend are indicators of low specialisation in the respective sector and comparative disadvantage of that sector. Figure 3.6 shows the estimated values of the RIA index for Sweden and the selected EU countries. Starting from 1999, the value of the Swedish RIA index continually increased over the period. The average increase in and was around 3% and 5% per year, respectively. The average increase between the two periods was 45%. The RIA index values increased for Germany and Ireland, while the Netherlands, Finland and UK had balanced imports, whereas the RIA index value for Denmark and Poland decreased. Figure 3.7 provides a graphical presentation of RIA average values for the periods and , as a complement to Table A7 (appendix). The findings obtained for the trade indices, explaining the competitiveness position of Swedish agriculture, confirm and extend those of several previous analyses of the competitiveness of the agricultural sector across Europe. Carraresi and Banterle (2008) assessed the competitiveness of the food industry and the agricultural sector of different European countries within the EU market over the period , comparing the changes in exports and various comparative advantage indices. Those authors showed that during the period , Sweden and Finland were among the countries with the lowest export market share, weak competitive position, not specialised, and with high import levels. After the new EU member states joined in , Sweden and Finland remained among the countries with the lowest export market share, but with stable trends for comparative advantage. During the whole period, Denmark and Ireland held an intermediate position, with medium export market share in the food and agriculture industry and very specialised in the food industry, but over time their position deteriorated. The Netherlands and Germany were among the countries with the highest export market share. The Netherlands, which was originally in the best position, lost ground greatly over the years, showing loss of competitiveness. In the same period Germany continued to have a high share of the export market, although not specialised, with constant improvements in comparative advantage. 19

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